Hours later, North Korea responded by saying it was seriously
considering a missile strike on the Pacific island of Guam, home
to a US military base.

A physical engagement between the two nations still looks highly
unlikely, but it is something that serious analysts and academics
have started to talk about.

Clearly, the biggest and most important impact of any conflict
between the US and North Korea — either nuclear or conventional —
would be a catastrophic loss of life and huge human suffering.

But in a note circulated to clients, the staff at the research
house Capital Economics has assessed the potential economic
impact that a conflict could have on the world's economic
prosperity.

Writing on Wednesday, Gareth Leather and Krystal Tan of Capital
Economics note that countries involved in major conflicts since
World War II have seen significant drops in economic output.

"The experience of past military conflicts shows how big an
impact wars can have on the economy. The war in Syria has led to
a 60% fall in the country's GDP," or gross domestic product, the
two wrote.

"The most devastating military conflict since World War Two,
however, has been the Korean War (1950-53), which led to 1.2m
South Korean deaths, and saw the value of its GDP fall by over
80%."

The chart below illustrates the drop in GDP of nine economies
affected by conflicts after World War II:

Capital
Economics

The Korean Peninsula, the most likely center of a conflict
involving North Korea, would bear the brunt of any economic
shock, Capital Economics' analysts suggest, with South Korea's
economy hit worst. That impact would inevitably spread to the
wider global economy, which, given that South Korea accounts for
2% of global GDP, could cause significant disruption.

Supply chains globally would be affected, with Capital Economics
using the major floods that hit Thailand in 2011 as a comparison
"because of the huge disruption and damage they caused to the
country's manufacturing industry." The writers continued: "The
impact on the economy was considerable. GDP in the final quarter
of 2011 fell by 4% y/y, led by a 16% contraction in manufacturing
output."

Further, they said the "impact of a war in Korea would be much
bigger," adding, "South Korea exports three times as many
intermediate products as Thailand."

They continued: "In particular, South Korea is the biggest
producer of liquid crystal displays in the world (40% of the
global total) and the second biggest of semiconductors (17%
market share). It is also a key automotive manufacturer and home
to the world's three biggest shipbuilders.

"If South Korean production was badly damaged by a war there
would be shortages across the world. The disruption would last
for some time — it takes around two years to build a
semi-conductor factory from scratch."

Here's the chart showing South Korea's share of global exports:

Capital Economics

A conflict could also have a major impact on the US economy,
given the cost of waging a war on foreign soil.

"At its peak in 1952, the US government was spending the
equivalent of 4.2% of its GDP fighting the Korean War. The total
cost of the second Gulf War (2003) and its aftermath has been
estimated at US$1trn (5% of one year's US GDP)," Leather and Tan
wrote.

"A prolonged war in Korea would significantly push up US federal
debt, which at 75% of GDP is already uncomfortably high."